Mr. ALGER. Your figures here have the mutual and reciprocal figures lumped together. I would like to ask you the same question I asked Mr. Houston in order to get a better understanding, which he is going to furnish for the record. Is there a differential that you see between the mutuals and the reciprocals? Mr. CATE. A differentiation in what respect? Mr. ALGERS. As to their setups, as to their organization, as to how income should be treated. I have been told that the Treasury Department has considered reciprocals and mutuals as different entities for tax purposes. Do you know of any difference in their operation that would require any different treatment? Mr. CATE. I see no difference and there is no difference in their operation that would require different treatment, and that is the substance of our support of the Boggs-Baker bill, that they be treated alike, but it is not my understanding, Mr. Alger, that the Treasury suggests different treatment for them. The Secretary in his testimony before this committee specifically endorsed the Boggs-Baker bill which would treat them all alike. Mr. ALGER. Yes, I realize that. You made a statement at the bottom of page 5 and the top of page 6, as you will recall, relative to a pure mutual or reciprocal. You say: A pure mutual or reciprocal company, that is, one that returns to its policyholders all of its net income, would pay no tax whatsoever under the bills. Only when, and to the extent that, a company departs from the mutual principle and retains part of its income do the bills provide for taxation. The bills would tax the income of a mutual company that is retained by the company and only that income. Having listened carefully to what Mr. Houston said speaking for the reciprocal viewpoint, I find little to contradict that statement by you. Do I understand that you would say that no tax is to be exacted against the money that reciprocals give back to their people? Mr. CATE. I agree with that. These reciprocals say they operate at cost. To the extent that they do operate at cost, and have no net income, if they, in fact, operate at cost and have no net income, I don't think they should pay a net income tax. If they, in fact, return all of their earnings to their policyholders, as some may-I don't know of one, but there may be instances where that is the case-and have no income, I don't think they should pay a tax. But where they retain their income, I think that should bear the corporate tax. Mr. ALGER. Thank you. The CHAIRMAN. Mr. Cate, let us not leave the record as you and I did on this example I gave because I was expecting you to remind me of the fact that we do not follow a contract period accounting situation. We look at taxable years. Mr. CATE. That is correct. The CHAIRMAN. Let me ask if we can get to what you were trying to tell me. In the example that I used of the $100 downpayment for the 3 years' protection and your analysis of it, wherein it was divided into three amounts for each of the 3 years, which would mean $33% of earned premium, we will call it, that is, received in the first year against which there is $30 of costs and losses, say, that would leave $31% for that year. That is what we are talking about, it is not? Mr. CATE. For that first year; yes, sir. The CHAIRMAN. Then, the question arises as to whether or not that is income and if so, to whom. Under the provisions of the bills that have been introduced carrying out the recommendations of the Secretary of the Treasury, that $33 would be allocated to my account, would it? Mr. CATE. Yes, sir. The CHAIRMAN. Subject to refund to me if it is not used in some subsequent year in connection with my contract? Mr. CATE. Yes, sir, if that were paid or declared. The CHAIRMAN. If that is done, then it is not income to the reciprocal? Mr. CATE. That is correct; yes, sir. The CHAIRMAN. It would be income to the reciprocal if it is not allocated to me. Mr. CATE. That is right. The CHAIRMAN. If it is allocated to me, though, it would not be. Mr. CATE. Then, it would not, Mr. Chairman. The CHAIRMAN. And $31% each year would add up to $10 which could be paid to me at the end of my contract period free of any tax? Mr. CATE. Yes; whatever is returned to you is completely deductible. The CHAIRMAN. I wanted the record to be clear on that. Mr. CATE. They are treated as separate years, Mr. Mills, in the 3 years, but only the $33% would be earned in the first year and that is treated as 1 year. The CHAIRMAN. Do the reciprocals now have loss carryback? Mr. CATE. No, they do not. The CHAIRMAN. Would they have loss carrybacks under the provisions of this bill? Mr. CATE. Yes, they would, because it taxes their total income. Under the provisions of the present law, they are taxed only on their investment income. Their underwriting losses or gains, whichever it may be, are not taken into account in the reciprocal at all and during this period they have had very substantial underwriting gains. For example, during the 17 years, 1943-59, they have had $396 million in underwriting gains, of which they have returned to their policyholders $334 million, but they have borne no tax on their underwriting gains as reported to the State. The CHAIRMAN. They still would not pay a tax on the underwriting gain so long as that portion of the income is allocated to each one of the contractors. Mr. CATE. Under the Boggs-Baker bill, where it is paid or declared to them in accordance with the way in which they keep their books is the way the statute provides. The CHAIRMAN. Any further questions of Mr. Cate? 70510 0-61-pt. 3- -15 We thank you, sir, for the discussion, and we appreciate your coming to the committee again. Thank you, sir. Mr. CATE. Thank you, sir. (The following letters were received by the committee:) THE NATIONAL BOARD OF FIRE UNDERWRITERS, New York, May 21, 1961. Re Boggs-Baker bill. Hon. WILBUR D. MILLS, Chairman, House Ways and Means Committee, DEAR CONGRESSMAN MILLS: I am informed that on May 22 a Mr. Cate undertook to state the position of the National Board of Fire Underwriters with reference to the above legislation. I had hoped to have the transcript before me at the time I was dictating this letter, but it has not come in. In any event, our position is one of "hands off" on the bill in the form in which it was introduced. In other words, we are neither opposing nor supporting the legislation. This is precisely the position we took when we met with Treasury and Joint Committee staff at their invitation in Washington some months ago. We request this letter be incorporated in the record-if possible at the point where the witness undertook to state our position. Yours very truly, J. RAYMOND BERRY, General Counsel. P.S.-I enclose copy of Mr. North's letter to Secretary Dillon to which we believe Mr. Cate referred. I know of no other letter written by Mr. North to Secretary Dillon on this matter. DEAR SIR: We would like to reaffirm a position which has previously been reported to your Department on behalf of the National Board of Fire Underwriters, relating to the so-called Boggs-Baker bill introduced in the last session of Congress. That position is expressed in a report of the tax subcommittees of the National Board of Fire Underwriters and the Association of Casualty and Surety Cos. to the effect that we are not opposed to the taxing of mutuals on the stock company basis. This position was reaffirmed by action of our executive committee at their meeting on January 28, 1960. We hope this reaffirmation will dispense any question in your mind as to our position on the so-called Boggs-Baker legislation. Sincerely yours, (S) J. A. N., President. ASSOCIATION OF CASUALTY & SURETY Cos., Re H.R. 6659 and H.R. 6660, Boggs-Baker bills. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, House Office Building, Washington, D.C. DEAR CONGRESSMAN MILLS: I have heard that on May 22 Mr. Arlindo S. Cate, testifying before the House Ways and Means Committee on behalf of the National Committee for Insurance Taxation, in response to an inquiry, made reference to the position of the Association of Casualty & Surety Cos. with respect to the above bills. As some misunderstandings may have arisen as a result of this testimony, we think you and your committee would like to know the position of our association with respect to this legislation. It is true, as disclosed by Mr. John A. North, in his February 28 letter to Secretary C. Douglas Dillon, that the Association of Casualty & Surety Cos. is not opposed to the taxing of mutuals on the stock company basis. This does not mean, however, that we are in any way supporting the above bills. In fact, ours is a position of neutrality and we are neither supporting nor opposing this legislation. Sincerely yours, ROBERT N. GILMORE, Jr., The CHAIRMAN. The committee will recess until 2 o'clock this after noon. (Whereupon, at 12:40 p.m., the committee was recessed, to reconvene at 2 p.m. the same day.) AFTERNOON SESSION The CHAIRMAN. The committee will please be in order. Our first witness this afternoon will be Mr. L. J. Desmond. Will you first identify yourself for the record by giving us your name, your address and the capacity in which you appear? STATEMENT OF L. J. DESMOND, LOS ANGELES, CALIF., REPRESENTING THE RECIPROCAL INTER-INSURERS FEDERAL TAX COMMITTEE Mr. DESMOND. My name is L. J. Desmond. I am the Controller of the Inter-Insurance Exchange of the Automobile Club of Southern California. My address is 2601 South Figueroa Street, Los Angeles, Calif. I appear here today as the representative of the Reciprocal InterInsurers Federal Tax Committee, an association of reciprocal exchanges. A list of the membership appears in appendix I. That membership list represents approximately 85 percent of the premium volume of our industry. (Appendix I is as follows:) APPENDIX I RECIPROCAL INTER-INSURERS FEDERAL TAX COMMITTEE Army Co-Operative Fire Association, Ft. Leavenworth, Kan. Belk Stores Insurance Reciprocal, Charlotte, N.C. Berwind Exchange, Philadelphia, Pa. California State Auto Association Inter-Insurance Bureau, San Franisco, Calif. Consumers and Distributors Insurance Exchange, San Francisco, Calif. Detroit Automobile Inter-Insurance Exchange, Detroit, Mich. Erie Insurance Exchange, Erie, Pa. Farmers Automobile Insurance Association, Pekin, Ill. Farmers Insurance Exchange, Los Angeles, Calif. Fire Insurance Exchange, Los Angeles, Calif. Inter-Insurance Exchange of the Auto Club of Southern California, Los Angeles, Calif. Inter-Insurance Exchange of the Chicago Motor Club, Chicago, Ill. Lumbermens Reciprocal Insurance Exchange, Little Rock, Ark. Old Hickory Insurance Exchange, Nashville, Tenn. Prairie State Farmers Insurance Association, Bloomington, Ill. State Automobile and Casualty Underwriters, Des Moines, Iowa Union Automobile Indemnity Association, Bloomington, Ill. Mr. DESMOND. I do not intend to read our entire presentation. There are several schedules I would like to refer to. The CHAIRMAN. You may proceed in your own manner with the understanding that all of your material and the appendices attached thereto will appear in the record. (Mr. Desmond's complete statement is as follows:) |